An Irrevocable Letter of Credit (or ILOC) is a financial instrument that may refer to a written promise from a bank to pay a seller a certain amount of money at a given date, provided that the seller meets certain requirements. It is a guarantee that the seller will receive payment for the goods or services provided, regardless of whether the buyer is able to pay.
Irrevocable Letters of Credit in More Detail
An Irrevocable Letter of Credit is generally used to ensure payment in international trade transactions. It is a secure way to ensure payment, as it is issued by a bank, and cannot be changed or revoked without the agreement of the involved parties.
The bank issuing the Irrevocable Letter of Credit acts as an intermediary between the buyer and the seller. The bank agrees to pay the seller the specified amount of money upon delivery of the goods or services. The buyer is then responsible for paying the bank back. This provides security for both parties, as the buyer is not responsible for paying the seller directly, and the seller is assured of payment without relying on the buyer’s creditworthiness.
An Irrevocable Letter of Credit is a binding agreement and is difficult to change or revoke. Once the bank issues the letter of credit, both parties must abide by its terms. This makes it a secure way to ensure payment and can be used in a variety of international trade transactions.
